Pension savings, stamp duty and Budget predictions

FT Money Show presenter Claer Barrett and guests discuss how much is enough when your saving into a pension, whether stamp duty is suffocating the housing market and what property measures we can expert in next week's Budget.

When it comes to pension savings, how much is enough? This is a very pertinent question for cash-strapped younger workers, who can often be tempted to stop contributing to their pension as they battle to pay down student loans and save for a housing deposit. But in the long term, it could prove a costly move.

So you were inspired to write about the health of long-term pension savings after meeting a young doctor.

Yes, I met a young doctor who's currently working up in Manchester. He's 29 years old. And he was telling me the story about when he started as a hospital doctor two years ago after studying, doing two degrees, and being in college and at university for around five to six years. He started his first job. It was with the NHS. And he was enrolled into the NHS pension scheme, which is a very good, defined benefit. It offers a secure income at the end of saving.

But he pulled out. He pulled out. He decided to opt out of the NHS pension scheme halfway through his first year as a doctor. Because he said he couldn't afford the pension contributions, which was 7% of his salary, or around GB 163 pounds a month, because he was just drowning in debt. He had around GB 47,000 of student loans to pay off each month. And that was being deducted from his salary.

But on top of that, he had a GB 3,000 overdraft associated with his student cost, and GB 500 worth of credit card debt. He said it wasn't frivolously drawn up at all. It was just the cost of studying and moving into the new job and getting settled.

He said it made sense for him to just pay down the debt first and then put a stop to the pension saving. He said it wasn't an easy decision to make. And people tried to tell him and talk him out of making that decision. But he thought it was the best thing to do was to deal with the debts.

Well, that's a really interesting way into this topic, which we get a lot of correspondence at FT Money from our younger readers, but also the older ones who have children who are worried that their children are putting off pension savings for too long. So your piece contains some examples of how much of a retirement fund a 25-year-old could save over the course of a 40-year career. But the numbers are quite surprising.

Yes. We've done a lot of number crunching to try and just draw out some stories and to provide some figures for the young people who are beginning their journey and to save for retirement. Now, we talk about saving. And a lot of questions is, how much do I need to save, as you rightly pointed out.

There is something called a target replacement rate, which provides something to aim for in retirement, based on what you're earning now. So for example, if you were earning the average earnings of GB 28,000 a year, your target replacement rate when you get to retirement would be around 2/3 of that. So you aim to retire with about 2/3, which is around GB 18,000.

And that figure basically recognises the fact that when you're older, you won't have the fixed costs of things like a mortgage necessarily every month. You might have paid that off.

Yeah, hopefully.

Fingers crossed. Our generation might not have done. You won't have to pay for your commute, for suits for work.

Yeah, you can step down. Your costs will step down.

But broadly enjoy the same standard of living that you have when you were in work. So say that, if you were on the average wage, GB 28,000, you would need to find GB 18,000 to maintain the same standard of living. So how much would you need to save in this pension?

So just for example, we had some numbers crunched on this. So you've got GB 18,000 to try and make up when you get to retirement. It seems about GB 8,000 pounds of that is going to come from the state pension, because that's the full state pension rate, leaving around GB 10,000 a year to be made up from your own private savings.

So if you were saving at 8% of your earnings for 40 years, you could expect to build a fund of around GB 165,000 after 40 years. Now, this is going to be well short of the GB 330,000 pounds that you would currently need to buy an index-linked annuity to guarantee a GB 10,000-a-year income to make up the shortfall.

So that's less than half. If you're saving 8%, you're on target for disappointment. You won't be buying a Lamborghini in retirement. You'll be catching the bus or on a scooter. So that's going to undershoot the target replacement rate by a significant amount.

If you were saving a little bit more, 10% of full salary-- now, that can come from you and your employer and tax relief. It doesn't have to come from a total chunk of your salary.

Of course.

You could build a much bigger pot of nearly GB 250,000. But that would still be around GB 80,000 short of the GB 327,000 needed to meet the target replacement rate of 2/3 of your pre-retirement income.

The only sure way to meet the target replacement rates if you're on average earnings is to get contributions up to around 15% of salary, which probably is off-putting for many young people, who are saving at minimum rates now. The only mandated rates are around 2%.

Well, exactly. And 15%, as you say in the piece, can be a lot to find, when you look at these projections. In the full article, I should say, there's lots of caveats to these numbers. It's very hard to predict things like pensions, because they're, by their nature, very, very long term. Annuity rates could change in the future. You could also maybe up your level of pension contributions as you get older, so try and make up some of the difference.

But can you give us any hope for younger savers listening, who are just listening to this, and think, we can't afford to save that much?

Well, I think you have to be like the doctor that I spoke to in Manchester who said he has to be practical and do what he can do and aim to restart his pension as soon as he's dealt with his debts. But he knew that he had good career prospects, and he could catch up later on in life. So I think it's important to just do what you can do. Start as early as you can. And then make those payments when you can make them.

You can make one-off pension contributions later in life. They're an excellent way to reduce tax, especially of income in a more profitable year would result in the loss of child benefits, should children come into your life later on, or the personal tax allowance, while also boosting your retirement fund. Start saving early is the key thing though when you can.

When you do invest, have a diversified portfolio of assets. And don't just rely on one or two funds. It's also important. So don't leave the money in cash over that period. Try and make it work harder for you.

The other thing is, maximise your employee contributions. Many firms go much further than the minimum. They will match what you pay in, but even double match. So you could find that you could reach that 15% of your salary by putting in 5% or 6% if your employer matches. And the older you get, it tends to be the case that the employees will pay higher contributions. So there's also that to actually explore. So it's not totally gloomy.

And better to start with something.

Yes.

If you're listening and thinking, oh, I can't afford it, even if you can only afford a little, little bit, the power of compounding over time make it less hard than you think.

Well, thanks very much there to the FT's Josephine Cumbo. And many congratulations for being voted National Newspaper Journalist of the Year by the Society of Pension Professionals last week, a well-deserved award. We'll have some champagne in the office on Friday.

You can read the full article that Jo has written, Pension Savings. How Much is Enough? in the Money section of the weekend newspaper this Saturday or online from Friday at ft.com/money.

Could stamp duty be something the chancellor is tempted to tinker with in next week's budget? Stamp duty on the typical home in London now represents more than 1/3 of average annual earnings in the Capital. That's according to a new study from the London School of Economics published this week. The report's authors say that the levy, which raises more than GB 8 billion a year for the treasury, needs an urgent rethink.

Professor Tony Travers of the LSE joins me now in the FT studio to discuss. Welcome, Tony.

Hello.

So why do you think that stamp duty is dysfunctional? And what parts of the housing market is it distorting?

Well, it's dysfunctional because it's a tax on the transaction, when you're trying to buy and sell a house in effect. And that means that it creates a powerful disincentive, particularly when it's at the high rates it's reached now for some of the most expensive properties. But of course, expensive properties in London and the Southeast are often owned by people who are not on particularly massively high incomes. So it distorts the operation of the property market.

And frankly, it creates a whole load of incentives not to do things like to sell and then to move on and buy somewhere else, if you perhaps were getting-- your family had left home and you wanted to move on. It's very hard for older people to move.

And secondly, it's simply taxes on transactions of this kind are less good than taxes which are more predictable over time on, say, the annual value of the property. So it's simply not a great tax.

OK, so the FT said this week separately that the chancellor is lining up a budget cut in stamp duty for first-time buyers potentially to help them get on the housing ladder, young people being one of the groups that Hammond really wants to appeal to in his plans next week. But is that the kind of thing that you want to see?

Well, that sort of tinkering, suppressing a symptom rather than curing the illness, if I can be-- I mean, the risk is undermining a proposal before it's even seen the light of day if it does.

Clearly, first-time buyers have to raise the deposit on a property and then, of course, this additional payment besides. And that, I think, does make it doubly difficult, particularly in London and the Southeast. I mean, it's not unique to London and the Southeast. But it's particularly acute there, where house prices are so high. So there's a housing supply issue in this as well. But it's now made more complicated by the operation of stamp duty. And of course, it's inhibition to transactions.

Now, your report also looks at the possibility of council tax reform. Now, that's something that politicians in this country have always been terrified of. But do you think that the problems within the housing market and now so acute, they'll have to tackle it?

Well, council tax, and then all discussions of even revaluing the base of council tax, are haunted by the spectre of Mrs. Thatcher, who introduced the poll tax in 1990 and 1989 in Scotland. In effect, it was one of the elements in her final demise and leaving office. And as a result of that, politicians are incredibly wary about doing anything to council tax.

But of course, council tax, or domestic rates, as they used to be-- if they were a properly operating annual tax on property, would react to changes in property prices far more rapidly than they do and actually send sensible market signals. The difficulty is not with talking through the logic of having a better operating council tax, and perhaps much less raised from stamp duty. But the question is how you'd get there. Because every hour that passes we don't reform, the annual taxation of property makes it more difficult to make any change at all, including sensible ones, which could include much less dependency on stamp duty.

Well, thanks very much to Professor Tony Travers. You can read more on this subject in the FT Money section this weekend, or online now at ft.com/money.

Staying with prophecy, what might first-time buyers, renters, and buy-to-let landlords expect at the first autumn budget next week? There won't be many windfalls. But the FT's Money Mentor columnist Lindsay Cook is ready with some predictions. And she's written about those in her Money Mentor column this week. Welcome, Lindsay.

So there are big expectations that the chancellor will try to do something to help young people in this budget. How might he do it?

Well, it could be stamp duty. There's been a lot of hype about help-to-buy, about there being an extra GB 10 billion available. Now, so far, that has benefited well-off young people and the builders.

So I would like to see probably some changes. It would be quite radical. But how about allowing Help to Buy on secondhand properties instead of new properties, which have got a premium on them and just build the profits for the builders?

And I'd like to see the Help to Buy ISA reformed, because that seems to help people who are not super rich and have got GB 90,000 deposit or whatever. It helps those. And if you had a larger amount that you could earn over a number of years-- we've got house prices that are probably not rising that fast at the moment, so people don't feel they've got to get onto the housing market tomorrow. If they start saving serious amounts of money and get 25% bonus on, say, GB 20,000 or GB 30,000, that will help them more.

Some good ideas there. But what about the considerably large numbers of young people who are renting a home?

And it's not just the young people renting now. It's quite a wide range of people. Last budget, or last November, we were promised that there would be a scrapping of the excessive fees for renting a property, which can amount to, say, GB 3,000 on GB 1,000-a-month rent. We've had the Tenant Fees bill, which has been published. It's a green paper at the moment. It'd be nice if it could get a little bit of a boost and get into the finance bill so it moved along a bit.

And that will ban all letting agent fees for tenants. But it will also introduce some quite punitive fines for landlords and letting agents who slip up.

It will. It will mean that agencies don't get a double whammy where they charge both the tenant and the landlord for the viewing fees, the finance checks, et cetera. Trading standards would be able to fine a landlord GB 5,000. If they're a repeat offender and they don't want to go to court, they can be fined up to GB 30,000. So it's going to be quite important, as long as it happens.

And what else might renters expect to see?

I would love to see-- and I'm not sure it's on anybody's radar yet. But I hear over and over again from people who've paid the deposit, they've kept the place impeccably, they're told the landlord needs the property back, and then they have to wait weeks and weeks and weeks to get their deposit back. And that means they have to find another six weeks worth of money to pay for their next flat. I think if you had a system where they had to pay interest or a penalty if they held onto the deposit without reason. They're in government schemes. They should be able to do it in a couple of days.

Yeah, I have to say that there's various people in the FT's own office who have come to me with similar problems recently.

So to give some comfort to those struggling to get onto the housing ladder, in this week's column, you've also looked at the maths of home ownership versus renting. Give us a brief synopsis of that.

Well, timing is everything. And If I was talking five years ago, I would not be putting this argument forward. But the market in the Southeast and London has slowed down. And I've got one particular property in mind that I know all the figures on. It's been rented out for five years at GB 1,600 a month. It's now on the market at half a million pounds. Others in the development have sold for that.

Now, somebody buying that, assuming they've got a GB 50,000 deposit, would be paying up to GB 2,500 a month in mortgage. They've also got to pay the service charge. They've also got to pay ground rent. And they've got to look after the repairs.

This means on that particular property-- and there are lots like it. It's just I know the figures for this one-- a renter would be paying about $6,000 a year less than the buyer. And of course, the renter hasn't paid stamp duty. And they don't have the problem at the end of they're trying to sell, the estate agent can't sell it straightaway, so they have to cut their price. And they can be paying quite substantial amounts. They may sell it online. Or they may end up paying GB 10,000 for an estate agent to get rid of it.

If you're owning a property for a short time, my view is, if you've got less than a five-year view on staying in a property and you're in expensive areas, you should actually look at the maths and say, well, I'm going to be better off if I rented somewhere, saved a bit more, and then buy. Because I don't think property prices are going to race up in the next few years.

We had that from Lucian Cook last week. I think this is a market view that prices are not racing ahead.

Well, thanks very much there to Lindsay Cook. You can read her Money Mentor column in the Money section from Saturday, or ft.com/money. And I'll also be making some budget predictions in my regular Serious Money column.

That's it from the FT Money Show. To get in touch with our team of financial experts, email us money, money@ft.com, tweet us at @FTMoney, or comment on articles online at ft.com/money. We will be back next week with our budget special podcast. Goodbye.